NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard

Kris James Mitchener, Marc D. Weidenmier

NBER Working Paper No. 15401
Issued in October 2009
NBER Program(s):   DAE   IFM

We test whether fixed exchange rate regimes are ever credible in emerging markets by analyzing the behavior of short-term domestic trade bills across countries during the classical gold standard period, the most widely used hard peg in modern financial history. We exploit the fact that global capital markets were unfettered in order to identify the currency-risk component using uncovered interest parity for 17 of the largest emerging market borrowers for the period 1870-1913. We show that five years after a country joined the gold standard, the currency risk premium averaged at least 285 basis points for emerging market economies. We estimate that investors expected exchange rates to fall by roughly 28 percent even after emerging market borrowers joined the gold standard. Positive currency risk premiums that persisted long after gold standard adoption suggests that hard pegs for emerging market borrowers may never be fully credible.

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This paper was revised on November 14, 2012

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Document Object Identifier (DOI): 10.3386/w15401

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